For some years it has been possible for small businesses to prepare tax accounts on the “cash basis”, ignoring stock and amounts owing/due at the year end. This has only been available to those with turnover below £150,000 and has carried restrictions for interest relief and losses. Probably as a result of the changes to MTD announced within the Autumn Statement, with effect from 2024 these restrictions will be removed and the cash basis becomes the default position for both individuals and partnerships, although conventional accounts remain an option.

There are transitional provisions (to ensure no tax is lost) and those in business will need to carefully consider the merits and downsides of changing the basis of accounts. Cash accounting doesn’t generally sit well within a partnership and, for many, conventional accounts will still be required by lenders (or indeed for financial management purposes). When one looks at the changes in detail, however, it is apparent that farmers may be particularly well placed to exploit the new regime. To reiterate, prior to these changes:

1. Cash basis only available if turnover <£150k and barred if it rises above £300k
2. Capital expenditure effectively fully expensed, except cars and building
3. Interest paid restricted to £500
4. Losses only to be carried forward against profits from the same trade
5. Certain businesses excluded, including those claiming averaging and those on the herd basis
6. Cash basis only available by election on SA return

As a result of the changes, conditions 1, 3 and 4 above are removed and, under condition 6, it is the accruals basis which becomes optional. Under the transitional rules, trade debtors and creditors, accruals and prepayments from accruals accounts will be adjusted against current year cash transactions, opening stock is added to current year purchases, any unrelieved CA pool (except cars) is written off and outstanding HP liabilities are added to turnover.

Since farmers tend to carry proportionately large levels of stock (in some cases up to a year’s turnover), the implications are clear. Unless there are very high HP labilities, the switch to a cash basis in 2024/5 will have a massive impact on taxable profits and may well turn a modest profit into a loss, which can presumably be carried back against the transitional profits of 2023/4.

Of course, the change will not fit all farms: herd basis farms are excluded, the ability to average will be lost (but changing the timing of sales can often make up) and those with large massive HP liabilities may not fully benefit (and as a side effect, the “do I buy it on the overdraft or on HP?” question may now have another facet). Most businesses will still need accruals accounts for partnership or borrowing purposes, but they can be redrafted onto a cash basis for tax. Nonetheless, in many respects the “tax must follow accounts” rule has been comprehensively broken.

To sum up:

• This cannot be ignored. The cash basis will be the default unless clients elect otherwise.
• It does not change accounting standards, but it does break the link between “proper accounts” and what goes on the SAR
• Partnerships and those with borrowing may need to consider the deferred tax implications
• Cash accounts will be of limited use for financial management purposes
• For PI purposes the calculation will need to be done and reviewed annually
• The conversion calculations are not difficult and presumably the accounting software will evolve to produce the calculation automatically

^{*The views expressed are the author’s and not ICAEW’s}